Election uncertainty and Fed rate cuts have led tax-exempt and taxable money market funds to reach 2024 highs as more market participants have taken a defensive position. As more market stability comes and rates fall, investors may move some of these funds back into fixed income markets, sources say.
“A more defensive tone has been in place as investors waited nine months for the first [Fed] rate cut,” said Kim Olsan, a senior fixed income portfolio at NewSquare Capital.
Higher short rates have been “an enticement” in money market and short-dated bonds, she noted.
The Money Fund Report, a weekly publication of EPFR, reported tax-exempt money market funds saw an addition of $3.2 billion of inflows in the latest reporting week. Tax-exempt money market funds reached a 2024 high of $136.84 billion for the week ending Wednesday, according to the Investment Company Institute. This is up $20.858 billion from the lows of Jan. 24, ICI reports.
Prior to the pandemic, there was around $2 trillion to $3 trillion in both tax-exempt and taxable money market funds, but that figure soared following the “shock” of COVID and panic in the market that led to an influx of cash, said Eric Golden, founder and CEO of fintech platform Canopy Capital Group.
It rose even more as the Fed started raising rates as money market funds became more attractive, contributing to the more than $6.585 billion currently in money market funds overall, according to ICI data.
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Related returns show a 1-2 year muni index outperforming long bonds year-to-date, Olsan said.
In contrast to 2016 and 2020, Olsan said the “current curve is still inverted by about 50 basis points between money market rates and 10-year yields (tax-exempt money markets are near 3.50% and 10-year high grades yield just through 3.00%).”
Muni money fund balances are around 5% higher than the level through the third quarter, she noted.
“Inputs that would hold the inversion in place for an extended period of time could incentivize money fund activity and deter further commitments out the curve,” she said.
Assets in money market funds continue to “slowly creep up,” as it’s been a “slow climb” out of all the volatility over the past two years, Rick White, an independent consultant, said.
And with “a lot more assets now in the marketplace,” money market funds are buying commercial paper, tender-option bonds, municipal notes, instead of just
There is still volatility throughout the month, White said.
At the beginning of the month, money comes in, and daily rates immediately react to that and positions can go from a few billion to “basically nothing,” White said, adding “that’s kind of what they’re at now.”
The money that came in the first part of November went to work in dailies, with positions dropped to “well under” $100 billion, he said.
Those rates are starting to “creep back higher,” but there is still a very heavily upward sloping yield, White said.
The SIFMA Swap Index fell to 2.68% Wednesday compared to the previous week’s 3.24%.
“We have increasing assets and the current SIFMA Index sitting at 70 basis points through the yearly average of 3.38%,” White said. “These are both positive trends if we hope to get some stability back into a market, which has faced extreme rate volatility over the past few years.”
Golden said the flow of funds will be
Money started flowing out of money market funds when the Fed announced rate cuts, catching market participants off guard because the economy was doing well and inflation had come down, he said.
“As the Fed cuts, whether quickly or slowly, that will directly impact the yield you’re getting in your money market fund, and this money has to go somewhere,” Golden said. “All this money isn’t going to flow into equities or bonds, but it’s going to go to a variety of asset classes.”
The “broad-based assumption” is some of that money will go into the bond space, with Golden arguing that for the highest tax bracket, money will go into muni products.
However, for tax-exempt money market funds, they are “still so tiny” compared to taxable money market funds and White is unsure if the end of the election cycle will lead to a noticeable difference in market participants putting money to work and pulling money from taxable funds and where it may end up.
Olsan noted the only way some amount of that money comes out of money market fund and goes out the curve is if USTs rally and the 10-year UST falls to 4%, but she does not see that happening.
“The volatility wants to calm down, but it’s a matter of continuing to see the flows empty in and out,” White said.